INVESTMENTS IN
PRE-IPO COMPANIES
WHAT IS A PRE-IPO INVESTMENT?
A 'Pre-IPO Investment', also known as a 'Pre-IPO Placement' occurs when part of an initial public offering (IPO) is placed with private investors just before the IPO is scheduled to hit the market. Private investors in a pre-IPO placement are typically large private equity or hedge funds that are willing to buy a large stake in the company. The size of the investment means the price paid for shares in a pre-IPO placement is usually less than the prospective IPO price. Over the last 10 years, pre-IPO investing has increased the number and frequency of accredited investors participating in pre-IPO placements.
More about Pre-IPOs
Another way to define a pre-IPO placement is the money raised by a company before it goes public. The amount per share is generally discounted from the expected IPO price. There is no real guarantee when the company will go public or the exact price per share will be when it does. These placements occur when there is a high demand for an upcoming IPO. This is because the placement's price per share—and its risk—is contingent on the company eventually going public and its eventual trading volume. The risk arises when the post-IPO demand is lower than expected demand, which decreases the share price. As mentioned above, pre-IPO placements compensate for this risk by offering a discounted price. But if demand causes post-IPO prices to increase, investors would be able to immediately sell the shares at a higher price. To prevent this, a lock-up period is generally attached to the placement. This period prevents these funds from selling the shares in the short-term, attracting more long-term investors.
Risks
Pre-IPO investing is risky and speculative, which is why such investments are limited to accredited investors. In determining whether or not to invest in a pre-IPO you should both personally evaluate whether or not you can withstand the risks of such an investment (to include the potential risk of loss) and carefully review the definition of accredited investor to make sure that you qualify to participate.
The risks include, but are not limited to, the risk that an IPO may not occur, which may result in the loss of some or all of the capital invested. In addition, as pre-IPO investments are private placements, they come with risks inherent to private placement investments. These include, but not limited to, the fact that such investments are typically illiquid, there may be restrictions on the sale or transfer of the investment, they involve a high degree of risk, and they may result in a loss of all of your investment. Finally each individual pre-IPO comes with risks particular to the company in which the investment is being made. Such risks should be fully disclosed in the offering documents, and an investor should always consider the specific risks carefully before making an investment.
As an accredited investor, you are deemed to be capable of evaluating the investment and bearing the risk of loss.
IP0 vs. PRE-IPO
What are the differences?
ONLY ACCREDITED INVESTORS CAN PARTICIPATE IN PRE-IPO INVESTMENTS
Jan. 31, 2019
The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate individual investors about what it means to be an “accredited investor.”
What does it mean to be an accredited investor?
Under the federal securities laws, only persons who are accredited investors may participate in certain securities offerings. One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering. Unlike offerings registered with the SEC in which certain information is required to be disclosed, companies and private funds, such as a hedge fund or venture capital fund, engaging in these exempt offerings do not have to make prescribed disclosures to accredited investors. These offerings involve unique risks and you should be aware that you could lose your entire investment.
Who is an accredited investor?
Individuals (i.e., natural persons) may qualify as accredited investors if they meet any of the following wealth, income, or financial sophistication criteria:
Financial Criteria
· Net worth over $1 million, excluding primary residence (individually or with spouse or partner)
· Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year
Professional Criteria
· Investment professionals in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82)
· Directors, executive officers, or general partners (GP) of the company selling the securities (or of a GP of that company)
· Any “family client” of a “family office” that qualifies as an accredited investor
· For investments in a private fund, “knowledgeable employees” of the fund
